Financial Instruments

IFRS 9
IFRS7
 Financial instruments
– A financial instrument is any contract that gives rise to a
financial asset of one entity and a financial liability or equity
instrument of another entity.

G sells to H on credit A buys shares in B

G has a trade receivable = a - A has an investment = a

financial asset financial asset
- H has a trade payable = a - B has issued share capital =
financial liability equity
• Therefore a credit sale = a • Therefore this is a financial
financial instrument. instrument.
 Financial assets
– A financial asset is any asset that is:
– cash
– a contractual right to receive cash or
e.g. a trade
another financial asset from another receivable
entity
– a contractual right to exchange financial
e.g. a derivative that
assets/liabilities with another entity is ‘in the money’
under conditions that are potentially
favourable
e.g. a share
– an equity instrument of another entity. investment in
another company
 Financial liabilities
– A financial liability is any liability that is a
contractual obligation:
– to deliver cash or another financial
asset to another entity, or e.g. a trade payable
– to exchange financial instruments
with another entity under
conditions that are potentially e.g. a derivative that
unfavourable, or is ‘out of the
money’
– that will or may be settled in the
entity’s own equity instruments.
Derivatives

– A derivative is a financial instrument or other

contract with all three of the following
characteristics:
– Its value changes in response to an underlying
variable (eg interest rate, forex rate …).
– It requires no (or a relatively small) initial net
investment.
– It is settled at a future date.

Examples: Share option, Futures contract

Exchanging financial instruments on favourable
/ unfavourable terms

I enter into a forward contract to buy 500 tonnes of cocoa in

3 months time at a fixed price of RM60 per kg.
•In 3 months time….
•If the price of cocoa is RM70/kg
•I am better off with my contract than without it
•I settle my contract on favourable terms
•“in the money”
•Have a financial asset

•If the price of cocoa is RM50/kg

•Then it would be cheaper to buy cocoa on the open market than with my
contract.
•I settle my contract on unfavourable terms
•“out of the money”
•Have a financial liability
Equity

– Any contract that evidences a residual interest in the assets

of an entity after deducting all of its liabilities.

– Remember the accounting equation:

– Assets = Liabilities + Capital (equity)
– Equity = Assets – Liabilities
 Substance over form
– The substance of a financial instrument, rather than its legal form, governs its
classification in the entity’s statement of financial position.
– Irredeemable shares
– Treated as equity because there is no obligation to deliver cash.
– Dividends are treated as a reduction in retained earnings.
– Redeemable shares
– Treated as debt because there is an obligation to return cash (usually a Non-CL)
– Dividends are treated as interest in the P&L.
Financial assets
 Financial assets – accounting
choices IFRS 9

– There are different categories for different types of

financial assets.
•Equity
•(eg shares) •Debt
•Fair value through profit and loss
•Fair value through profit and
loss •Amortised cost
•Fair value through other •Fair value through other comprehensive
comprehensive income income
 Financial assets: Equity
instruments

– E.g. a company buys a share investment in another

company.
Fair value through profit and
loss (FVPL) Fair value through other
• Default position. comprehensive income (FVOCI)
• Has to be used for assets • Alternative position.
acquired for trading (i.e. • Can only use if:
those held in the short • Asset is not held for trading
term). (i.e. not for the short term).
• Has to be used for • The decision to classify as
derivatives. FVOCI is designated at
inception (subsequently you
cannot change
classification).
 Financial assets: Debt
instruments
– E.g. a company buys loan notes / bonds in another company.

Fair value
Business model and contractual cash flow test
through profit
• The contractual cash flow characteristics test
and loss (FVPL)
- the FA has cashflows that are solely
• Fail SPPI
payments of principal and interest (SPPI)
test
AND
• Held for
• The business model test
trading

Fair value through other comprehensive income

Amortised cost
(FVTOCI)
• The business intends to hold the FA to
• The business intends to hold the FA to
collect the contractual cash flows rather
collect the contractual cash flows AND sell it
than sell it to make a profit.
to make a profit.
• Meets SPPI test
• Meets SPPI test
Fair value through profit and loss: Accounting
treatment
Initially

– Record the asset at fair value = purchase price.

– Any transaction costs are expensed in the P&L.
Dr Financial asset x (the purchase price)
Dr P&L x (transaction costs)
Cr Cash x (the full cash paid amount)
Subsequently
– Each year end re-state to fair value.
– Any gains / losses recorded in the P&L.

Dr / Cr Financial asset x
Dr / Cr P&L x
Lecture Example 1

– On 1 January 20X3, Beautiful Ltd bought 10,000 shares in Fare

Ltd for RM3.50 each. Brokers fees of RM600 were incurred.
These shares were bought to be sold at a profit at a future date.
– By the year end 31 December 20X3, shares in Fare Ltd were
being traded at RM3.90 each.
– By the year end 31 December 20X4, the shares are available to
purchase at RM2.70 each.

– Discuss, with journals, the treatment of the shares in Fare at

each point in time.
Solution 1

– Per IFRS 9, the shares are an equity investment held for

trading purposes, and therefore they will be classified as
FVPL on acquisition.

– On 1 January 20X3 …..

Solution 1

– Per IFRS 9, the shares are an equity investment held for

trading purposes, and therefore they will be classified as
FVPL on acquisition.
– On 1 January 20X3, they are recorded at their fair value,
being their purchase price of RM35,000 (10,000 shares @
RM3.50 each).
– Transaction costs of RM600 are recorded as an expense in
the P&L.
Dr Financial asset RM35,000
Dr P&L RM600
Cr Cash RM35,600
Solution 1 (continued)

– At 31 December 20X3, the shares will be re-stated to their

fair value of RM39,000 (10,000 shares x RM3.90).
– The gain of …..
Solution 1 (continued)

– At 31 December 20X3, the shares will be re-stated to their

fair value of RM39,000 (10,000 shares x RM3.90).
– The gain of RM4,000 (RM39k - RM35k) is recognised in the
P&L.

Dr Financial asset RM4,000

Cr P&L RM4,000
Solution 1 (continued)

– At 31 December 20X4,
Solution 1 (continued)

– At 31 December 20X4, the shares will be re-stated to their

fair value of RM27,000 (10,000 shares x RM2.70).
– This gives rise to a loss of RM12,000 (RM27k - RM39k)
which is recognised in the SP&L.

Dr P&L RM12,000
Cr Financial asset RM12,000
 Financial statement extracts

– Produce extracts of the financial statements for

Beauti atofeach
Statement year
financial endatin31respect
position Dec: of their
investment in Fish. 20X3 20X4
NCA – Financial assets 39,000 27,000

Statement of profit or loss for the year ended 31 Dec:

20X3 20X4
Gain / (loss) on financial assets 4,000 (12,000)
Fair value through OCI (FVTOCI):
Accounting treatment for equity investments

Initially
Dr Financial asset x
Cr Cash x
– Record the asset at fair value
= purchase price + transaction costs.

Subsequently
– Each year end re-state to fair value.
– Any gains / losses recorded in the Investment Reserve (through OCI).

Dr / Cr Financial asset x NB The investment reserve can be

Dr / Cr Investment reserve x negative!
Lecture Example 2

– On 1 June 20X1, Dame Ltd bought 8,000 shares in Posh Ltd

for RM7.60 each. Brokers fees of RM3,040 were incurred.
– Dame intends to hold these shares for the long term and is
keen to avoid volatility in their P&L if possible.
– At the year end 31 May 20X2, Posh’s share price was
RM6.80.
– At 31 May 20X3, the share price was RM7.70.
– Discuss, with journals, the treatment of the shares in Posh
at each point in time.
Solution 2

– Per IFRS 9, the shares are an equity investment held for the
long term. Therefore Winchmore should designate them as
FVOCI on inception. (This cannot be changed later).
– On 1 June 20X1, they are recorded at their fair value, being
…..
Solution 2

– Per IFRS 9, the shares are an equity investment held for the
long term. Therefore Winchmore should designate them as
FVOCI on inception. (This cannot be changed later).
– On 1 June 20X1, they are recorded at their fair value, being
their purchase price of RM60,800 (8,000 shares @ RM7.60
each), plus transaction costs of RM3,040. Therefore the
total value of the FA is RM63,840.

Dr Financial asset RM63,840

Cr Cash RM63,840
Solution 2 (continued)

– At 31 May 20X2, the shares will be re-stated to their fair

value of …..
Solution 2 (continued)

– At 31 May 20X2, the shares will be re-stated to their fair

value of RM54,400 (8,000 shares x RM6.80).
– This gives a loss of RM9,440 (RM63,840 - RM54,400) which
is recognised through OCI in the Investment Reserve.

Dr Investment reserve RM9,440

Cr Financial asset RM9,440
NB the
investment
reserve is
negative!
Solution 2 (continued)

– At 31 May 20X3,
Solution 2 (continued)

– At 31 May 20X3, the shares will be re-stated to their fair

value of RM61,600 (8,000 shares x RM7.70).
– This gives a gain of RM7,200 (RM61,600 - RM54,400) which
is recognised through OCI in the Investment Reserve.

Dr Financial asset RM7,200

Cr Investment reserveRM7,200

– The carrying amount of the investment reserve is …..

Solution 2 (continued)

– At 31 May 20X3, the shares will be re-stated to their fair

value of RM61,600 (8,000 shares x RM7.70).
– This gives a gain of RM7,200 (RM61,600 - RM54,400) which
is recognised through OCI in the Investment Reserve.

Dr Financial asset RM7,200

Cr Investment reserveRM7,200

– The carrying amount of the investment reserve is

(RM2,240) (RM9,440 - RM7,200).
 Financial statement extracts

–Statement of financial
Produce extracts position
of the at 31
financial May:
statements for
Winchmore at each year end 20X2
in respect of their20X3
investment in Palmers. 54,400
NCA – Financial assets 61,600

Equity – Investment reserve (9,440) (2,240)

Statement of other comprehensive income for the year ended 31 May:
20X2 20X3
Gain / (loss) on financial assets (9,440) 7,200
 Amortised cost: Accounting
treatment
Initially
– Record the asset at fair value = purchase price + transaction
costs.
Subsequently
The interest element is recognised in the P&L each year, and the financial
asset is held at its carrying amount in the SFP. Use an amortised cost
table:
Balance b/f Interest Cash Balance c/f
x x (x) x

From initial Dr FA
treatment Cr P&L Dr Cash
Dr FA (interest Cr FA
Cr Cash income)
 Lecture Example 3

– On 1 January 20X1 Leonard Ltd bought 50 RM100 loan notes in Sheldon Ltd
for RM4,600, and incurred additional issue costs of RM400.
– The loan notes pay annual interest in arrears of 10% and are redeemable in 3
years time for RM5,337. It is Leonard’s intention to hold onto the loan notes
until this time.
– The effective interest rate (EIR) implicit within the loan notes is 12%.
– Discuss the treatment of the loan notes in Leonard’s financial
statements for the 3 years ended 31 December 20X1, X2 and
X3.
Solution 3

– Per IFRS 9, the loan notes should be held under amortised

cost by Leonard because:

– Leonard passes the business model test

because ….

– Leonard also passes the contractual cash flow

characteristics test because ….
Solution 3

– Per IFRS 9, the loan notes should be held under amortised cost
by Leonard because:
– Leonard passes the business model test because
they intend to hold the loan notes to collect the
contractual cash flows rather than sell it to make a
profit.
– Leonard also passes the contractual cash flow
characteristics test because the loan notes contain
cash payments (at 10%) that are payments of
interest and capital.
Solution 3 (continued)

– Initially, on 1 January X1, the loan notes should be recorded

at fair value being

Dr Financial asset
Cr Cash
Solution 3 (continued)

– Initially, on 1 January X1, the loan notes should be recorded

at fair value being their purchase price (RM4,600) plus
transaction costs (RM400), so RM5,000.

Dr Financial asset RM5,000

Cr Cash RM5,000
 Solution 3 (continued)

– Subsequently, the loan notes are held under amortised cost

as b/f
follows: Interest Cash c/f
(12%) (10% x RM5,000)

20X1 5,000 600 (500) 5,100

20X2 5,100
20X3
Dr FA
Cr P&L Dr Cash
(interest Cr FA
income)
 Solution 3 (continued)

– Subsequently, the loan notes are held under amortised cost

as b/f
follows: Interest Cash c/f
(12%) (10% x RM5,000)

20X1 5,000 600 (500) 5,100

20X2 5,100 612 (500) 5,212
20X3
Dr FA
Cr P&L Dr Cash
(interest Cr FA
income)
 Solution 3 (continued)

– Subsequently, the loan notes are held under amortised cost

as b/f
follows: Interest Cash c/f
(12%) (10% x RM5,000)

20X1 5,000 600 (500) 5,100

20X2 5,100 612 (500) 5,212
20X3 5,212 625 (500) 5,337
Dr FA
Cr P&L Dr Cash
(interest Cr FA
income)
Solution 3 (continued)

– In the year ended 31 December X1:

– Investment income of RM600 is recorded in the SP&L.
– The carrying amount of the FA is RM5,100 in the SFP.

– In the year ended 31 December X2:

– In the year ended 31 December X3:

Solution 3 (continued)

– In the year ended 31 December X1:

– Investment income of RM600 is recorded in the SP&L.
– The carrying amount of the FA is RM5,100 in the SFP.

– In the year ended 31 December X2:

– Investment income of RM612 is recorded in the SP&L.
– The carrying amount of the FA is RM5,212 in the SFP.

– In the year ended 31 December X3:

– Investment income of RM625 is recorded in the SP&L.
– The carrying amount of the FA is RM5,337 in the SFP.
 Solution 3 (continued)

– Produce of
Statement extracts of the
financial SP&L at
position and
31SFP for each of the 3
Dec:
year ends: 20X1 20X2 20X3
NCA – Financial assets 5,100 5,212 -

Statement of Profit and loss for the year ended 31 Dec:

20X1 20X2 20X3
Investment income 600 612 625
Fair value through OCI (FVTOCI):
Accounting treatment for debt investments
Initially
Dr Financial asset x
Cr Cash x
– Record the asset at fair value
= purchase price + transaction costs.

Subsequently
– Each year end recognise interest income in the SPL and then re-state
to fair value.
– Any gains / losses recorded in the Investment Reserve (through OCI).
NB
Dr / Cr Financial asset x
Dr / Cr Investment reserve x The investment reserve can be
negative!
 Lecture Example 4
– Return to Example 3.

– Leonard may sell the bond if the possibility of an investment with a higher
return arises.
– The fair value of the bond was: RM5,600 on 31 December X1; and RM5,400
on 31 December X2.

– Discuss the treatment of the bond in Leonard’s financial

statements for the 3 years ended 31 December 20X1, X2 and
X3.
 Solution 4
– The amounts in P&L as interest income are the same as they would be under
amortised cost :

b/f Interest Cash c/f Gain / Loss FV c/f

(12%) (10% x
RM5,000)

20X1 5,000 600 (500) 5,100 +500 5,600

20X2 5,600 612 (500) 5,712 - 312 5,400
20X3 5,400 625 (500) 188 - 188
(5,337)
 Solution 4

YE 31.12.X1: interest income in P&L is RM600; revaluation gain of RM500 in OCI;

asset in SFP is RM5,600.

YE 31.12.X2: interest income in P&L is RM612; revaluation loss of RM312 in OCI;

asset in SFP is RM5,400.

YE 31.12.X3: interest income in P&L is RM625; revaluation loss of RM188 in OCI.

 Disposal of financial assets

– When the company sells a financial asset they will calculate

RM Double entry
a profit or loss on disposal in the P&L.
Proceeds x Dr Cash
Less carrying amount (X) Cr Financial asset
Re-classify Investment reserve x / (x) Dr / Cr Investment
(only for debt instruments reserve
classified as FVTOCI)
Profit or loss x / (x) Dr / Cr P&L
Financial
liabilities
 Financial liabilities – accounting
choices

– There are two possible accounting treatments:

Fair value through profit and loss Amortised cost

(FVPL)

• Has to be used for liabilities • Used for all other financial

issued for trading (i.e. the short liabilities.
term) • Usually applied to
• Has to be used for derivatives. borrowings, loans, bonds.
Fair value through profit and loss: Accounting
treatment
Initially

– Record the liability at fair value = issue price.

– Any transaction costs are expensed in the P&L.
Dr Cash x (the issue price)
Cr Financial liability x (the full cash paid amount)

Dr P&L x (transaction costs)

Cr Cash x (transaction costs)

Subsequently Dr / Cr FL x
Dr / Cr P&L x
– Each year end re-state to fair value.
– Broadly, gains / losses recorded in the P&L*.
 Amortised cost: Accounting
treatment
Initially
– Record the liability at fair value = net proceed (issue proceeds
less transaction costs)
Subsequently
– The interest element is recognised as a finance cost each year in the P&L, and
the financial liability is held at its carrying amount in the SFP. Use an
amortised cost table:
Balance b/f Interest Cash Balance c/f
x x (x) x
From initial
Dr Finance
treatment Dr FL
cost
Dr Cash Cr Cash
Cr FL
Cr FL
Equity
 Accounting treatment

– When a company issues equity it is recorded:

Dr Cash x
Cr Equity x

– Subsequently, equity remains the same.

Compound
Instruments
Compound instruments

– A compound instrument is a financial instrument that has

characteristics of both equity and liabilities.

Example: A convertible bond:

– We issue a 3 year convertible bond for RM100.
– The bondholder will receive interest every year at a pre-determined
%.
– On redemption, shareholders have the option of
– receiving cash (e.g. ‘at par’)
– taking equity shares in the company (e.g. for every RM100 bond held,
receive 5 shares in the company).
Accounting treatment

– We use split accounting to recognise both the equity and

liability components of the instrument.
– There is a liability element, as the investors may require their money
back –the bondholder takes the cash option
– There is also an equity element, as the investors may choose to
convert the loan into shares instead –the bondholder takes the
shares.

– We have to use split accounting on issuing the bond as the

bondholder does not decide which option to choose until the
redemption date – the company has to recognise both
eventualities.
Accounting treatment

•Proceeds from issue

•Dr Cash

•1. Liability component

•The present value of an equivalent bond with no option for
conversion.
•Cr Financial Liability

•2. Equity component

•The balancing figure (β): Cash Proceeds – Financial Liability
•Cr Equity (Shares to be issued)
Lecture Example 5

– On 1 January X1, Pebbles Ltd issued 500,000 RM100 convertible

bonds at par, there were no issue costs.
– The bonds have the following terms:
– A coupon rate of 10% payable annually in arrears.
– The bond is redeemable at par on 31 December X3.
– Bondholders may opt for conversion. The terms of
conversion are two ordinary shares for every RM100 of
debt.
– Bonds issued by similar companies without any conversion rights currently
bear interest at 15%.
Show the treatment of the bond at each point in time for the 3 years.
Solution 5

– Per IFRS 9, on 1 January X1, the convertible bond must be

separated into its debt (liability) and equity components
using split accounting.
– The liability component is equal to the present value of an
equivalent bond without the option for conversion.
– The equity component is the balancing figure (the
difference between the cash proceeds received and the
liability component).
Solution 5 (continued)

•Proceeds from issue =

•1. Liability component

•2. Equity component

 Solution 5 (continued)

•Proceeds from issue

•= 500,000 x RM100 = RM50,000,000
•Dr Cash RM50m
•1. Liability component
Dec X1 Dec X2 Dec X3
Interest 5m
(RM5m x
10%)
Redemption •2. Equity component
Total CF 5m
Discount
factor (15%)
PV 4.348m
 Solution 5 (continued)

•Proceeds from issue

•= 500,000 x RM100 = RM50,000,000
•Dr Cash RM50m
Dec X1 Dec X2 Dec •1.
X3 Liability component
Interest 5m 5m
(RM50m x
10%)
.Redemption
Total CF 5m 5m
Discount
factor (15%)
PV 4.348m 3.781m
 Solution 5 (continued)

•Proceeds from issue

•= 500,000 x RM100 = RM50,000,000
•Dr Cash RM50m
•1. Liability component
Dec X1 Dec X2 Dec X3
Interest 5m 5m 5m
(RM5m x
10%)
Redemption •2. Equity component
50m
Total CF 5m 5m 55m
•= Cash received – Debt part
Discount
factor (15%)
PV 4.348m 3.781m 36.163m
44.292m
Cr Financial Liability RM44.292m
 Solution 5 (continued)

•Proceeds from issue

•= 500,000 x RM100 = RM50,000,000
•Dr Cash RM50m
•1. Liability component
Dec X1 Dec X2 Dec X3
Interest 5m 5m 5m
(RM5m x = RM50m - RM44.292m
10%)
= RM5.708m
Redemption •2. Equity component Cr Equity (shares to be
50m
Total CF 5m 5m 55m Issued ‘STBI’)
Discount RM5.708m
factor (15%)
PV 4.348m 3.781m 36.163m
44.292m
Cr Financial Liability RM44.292m
 Solution 5 (continued)

– Subsequently, at the 31 December each year end:

– Equity remains the same at RM5.708m
RM’000 – b/f Interest is held under
The liability component Cash
amortised cost as c/f
follows:
(15%) (10% x RM50m)

20X1 44,292
20X2
20X3
 Solution 5 (continued)

– Subsequently, at the 31 December each year end:

– Equity remains the same at RM5.708m
RM’000 – b/f Interest is held under
The liability component Cash
amortised cost as c/f
follows:
(15%) (10% x RM50m)

20X1 44,292 6,644 (5,000) 45,936

20X2
20X3
 Solution 5 (continued)

– Subsequently, at the 31 December each year end:

– Equity remains the same at RM5.708m
RM’000 – b/f Interest is held under
The liability component Cash
amortised cost as c/f
follows:
(15%) (10% x RM50m)

20X1 44,292 6,644 (5,000) 45,936

20X2 45,936 6,890 (5,000) 47,826
20X3
 Solution 5 (continued)
– Subsequently, at the 31 December each year end:
– Equity remains the same at RM5.708m
– The liability component is held under amortised cost as follows:

RM’000 b/f Interest Cash c/f

(15%) (10% x RM50m)

20X1 44,292 6,644 (5,000) 45,936

20X2 45,936 6,890 (5,000) 47,826
20X3 47,826 7,174 (5,000) 50,000
(rounded!)
 Solution 5 (continued)
RM’000 b/f Interest Cash c/f

20X1 44,292 6,644 (5,000) 45,936

20X2 45,936 6,890 (5,000) 47,826
20X3 47,826 7,174 (5,000) 50,000

– 31 December X1
– The finance cost recorded in the P&L is RM6,644.
– The carrying amount of the FL in the SFP is RM45,936.

– 31 December X2
– The finance cost recorded in the P&L is RM6,890.
– The carrying amount of the FL in the SFP is RM47,826.

– 31 December X3
– The finance cost recorded in the P&L is RM7,174.
– REDEMPTION DATE – WHAT NOW?!
 Solution 5 (continued)

– The 31 December X3 is the redemption date.

– In the SFP we have:
– A financial liability with a carrying amount of RM50m.
– Equity (shares to be issued) of RM5.708m.

Bondholder chooses cash option

Redeemable at par (RM50m) Bondholder chooses share option

• Dr Financial Liability RM50m
• Cr Cash RM50m 2 shares for every RM100 debt
No longer need the shares to be issued = 1m shares (50m x 2/100)
• Dr Equity (STBI) RM5.708m
• Cr Equity (RE) RM5.708m
 Solution 5 (continued)

– The 31 December X3 is the redemption date.

– In the SFP we have:
– A financial liability with a carrying amount of RM50m.
Bondholder chooses cash option
– Equity (shares to be issued) Bondholder chooses share option
of RM5.708m.
Redeemable at par (RM50m)
2 shares for every RM100 debt
• Dr Financial Liability RM50m
= 1m shares (50m x 2/100)
• Cr Cash RM50m
• Dr Financial Liability RM50m
No longer need the shares to be issued
• Dr STBI RM5.708m
• Dr Equity (STBI) RM5.708m
• Cr Share Capital (RM1 NV)
• Cr Equity (RE) RM5.708m
• Cr Share Premium (β)
 Solution 5 (continued)

– The 31 December X3 is the redemption date.

– In the SFP we have:
– A financial liability with a carrying amount of RM50m.
Bondholder chooses cash option Bondholder chooses share option
– Equity (shares to be issued) of RM5.708m.
Redeemable at par (RM50m) 2 shares for every RM100 debt
• Dr Financial Liability RM50m = 1m shares (50m x 2/100)
• Cr Cash RM50m • Dr Financial Liability RM50m
No longer need the shares to be issued • Dr STBI RM5.708m
• Dr Equity (STBI) RM5.708m • Cr Share Capital (RM1 NV) RM1m
• Cr Equity (RE) RM5.708m • Cr Share Premium (β) RM54,708m
IFRS 7: Disclosures

– For the risks arising from financial instruments, both

qualitative and quantitative disclosures should be provided
for each type of risk: typically credit risk, liquidity risk and
market risk.
– The qualitative disclosures describe management’s
objectives, policies and processes for managing those risks.
– The quantitative disclosures provide information about the
extent to which the entity is exposed to risk, based on
information provided internally to the entity’s key
management personnel.
Risks arising from financial
instruments

– Credit risk: The risk that one party to a financial instrument

will cause a financial loss for the other party by failing to
discharge an obligation.

– Liquidity risk: The risk that an entity will encounter

difficulty in meeting obligations associated with financial
liabilities that are settled by delivering cash or another
financial asset.
Risks arising from financial instruments
(continued)
– Market risk comprises three types of risk:
– Currency risk:

– Interest rate risk:

– Other price risk:

Can you explain how these risks arise?

Risks arising from financial instruments
(continued)
– Market risk comprises three types of risk:

– Currency risk: The risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in
foreign exchange rates.
– Interest rate risk: The risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in market interest rates.
– Other price risk: The risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in
market prices (other than those arising from interest rate risk or
currency risk).